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Water Research Foundation #4366 ‐ Defining a Resilient Business Model for Water Utilities
Part 1
Blog Posts – Appendix B
Presenters
Mary Tiger ‐ University of North Carolina Environmental Finance Center
Jeff Hughes ‐ University of North Carolina Environmental Finance Center
Shadi Eskaf ‐ University of North Carolina Environmental Finance Center
Defining A Resilient Business Model for Water Utilities
Webinar Outline
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Background
Major takeaways
Detailed findings
Project resources
Questions and answers
Audience Poll: Is there a new normal for your utility? If so, what is it?
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No new normal – business as usual
Changing climate
Declining consumption
Looming capital deficit
Some or all of the above….and more
Team: Environmental Finance Center at UNC
Jeff Hughes
Principal Investigator
Mary Wyatt Tiger
Project Manager
Stacey Isaac Berahzer
Outreach Coordinator
Shadi Eskaf
Technical Lead
Sarah Royster
Technical Support
Team: Raftelis Financial Consultants
Doug Bean
Project Advisor and Liaison
Peiffer Brandt
Co‐Principal Investigator
Alexis Warmath
Utility Liaison
Catherine Noyes
Technical Support
Rocky Craley
Technical Support
Project Advisory Committee
• Nick Dugan, US Environmental Protection Agency
• Amber Halloran, Louisville Water Company
• Scott Haskins, CH2M Hill
• Myron Olstein, Independent Consultant
Revenue Resiliency: Trends – Factors ‐ Strategies
ASSESSING THE REVENUE RESILIENCE OF THE INDUSTRY’S BUSINESS MODEL
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Trends in Financial Performance
• Operating Revenues
• Operating Expenses
• Debt
Pricing Trends and Financial Resilience
STRATEGIES AND PRACTICES FOR REVENUE RESILIENCY
FACTORS INFLUENCING REVENUE RESILIENCE
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Service Area Size and Diversity
Water Use and Weather
Economic Conditions
Capacity Utilization
Economic Regulation and Governance
Financial Management Strategies
Credit Rating Agencies
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Demand Projections
Alternative Rate Designs
Rate Stabilization Reserves
Rethinking Utility Services
Financial Performance
Targets
Customer Affordability/Assistance Programs
Rate Adjustment Approaches
Focus on Revenues and Rates
External Features: Constraints,
Opportunities, Responsibilities, and
Demands
Internal Policy Choices
Pricing and
Rates
Revenues
Financial
Condition
Spending Pressures
(and obligations)
Spending
Monitoring Trends
Project Resources
TOOLS
REPORT
SLIDES
BLOG POSTS
Key Findings
Business model is not completely broken, but…
• The past five years have been trying ones for the industry
• In order to raise sufficient and predictable revenues in the future, utilities must move beyond the approach of small rate modifications and…
Key Recommendations
• Understand their business risk for disruptive revenue fluctuations
• Adopt basic policies and performance targets to drive financial decisions
• Re‐examine sales projection methodologies
• Consider the repercussions of the message that customers are buying gallons of water when the cost side of the business model suggests they are buying access to water
• Consider new pricing models
Revenue Resiliency: Trends – Factors ‐ Strategies
ASSESSING THE REVENUE RESILIENCE OF THE INDUSTRY’S BUSINESS MODEL
•
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Trends in Financial Performance
• Operating Revenues
• Operating Expenses
• Debt
Pricing Trends and Financial Resilience
STRATEGIES AND PRACTICES FOR REVENUE RESILIENCY
FACTORS INFLUENCING REVENUE RESILIENCE
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Service Area Size and Diversity
Water Use and Weather
Economic Conditions
Capacity Utilization
Economic Regulation and Governance
Financial Management Strategies
Credit Rating Agencies
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Demand Projections
Alternative Rate Designs
Rate Stabilization Reserves
Rethinking Utility Services
Financial Performance
Targets
Customer Affordability/Assistance Programs
Rate Adjustment Approaches
ASSESSING THE REVENUE RESILIENCE OF THE INDUSTRY’S BUSINESS MODEL
Trends in Financial Performance:
Operating Revenues as Percent of Revenues
100%
90%
80%
Percent of Utilities
70%
60%
50%
40%
30%
20%
10%
0%
Upto75%
76‐80%
81‐85%
86‐90%
91‐95%
96‐100%
Total Operating Revenues as a Percent of Total Revenues
DataanalyzedbytheEnvironmental FinanceCenterattheUniversityofNorthCarolina,ChapelHillandRaftelisFinancialConsultants,Inc.DataSource:
Moody'sWaterandSewerMunicipalFinancialRatioAnalysis.
Total operating revenues as a percent of total revenues among 662 utilities nationwide in 2012
Trends in Financial Performance:
Customer Sales as a Percent of Operating Revenues
Revenues from customer sales as percent of total operating revenues in FY2011
Trends in Financial Performance:
Commodity Charges as a Percent of Customer Sales
Layers of revenues and the proportion of revenues from commodity charges in two utilities
Audience Poll: What percentage of your customer sales revenues come from commodity charges (volumetric rates)?
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91‐100%
75‐90%
50‐74%
30‐49%
< 30%
Don’t know
Fixed versus variable costs and revenues for two utilities
Trends in Financial Performance: Operating Expenses as a Percent of Total Expenses
Total operating expenses as a percent of total expenses among 260 utilities nationwide
18%
16%
14%
High revenue growth
12%
10%
Interquartile
range(25thto
75thpercentiles)
8%
Revenues increased
Low revenue growth
6%
4%
2%
0%
‐2%
‐4%
2004to
2005
2005to
2006
2006to
2007
2007to
2008
2008to
2009
2009to
2010
2010to
2011
Median
Revenues decreased
Annual Change to the Total Operating Revenues Between Years
Industry Revenue Growth Roller Coaster
DataanalyzedbytheEnvironmental FinanceCenterattheUniversityofNorthCarolina,ChapelHillandRaftelisFinancialConsultants,Inc.Data
Source:Moody'sWaterandSewerMunicipalFinancialRatioAnalysis.Thecohortof485utilitiesisconsistentacrossallyears.
Annual change in total operating revenues among the same 485 utilities nationwide
18%
16%
14%
High revenue growth
12%
10%
Interquartile
range(25thto
75thpercentiles)
8%
Revenues increased
Low revenue growth
6%
4%
2%
0%
‐2%
‐4%
2004to
2005
2005to
2006
2006to
2007
2007to
2008
2008to
2009
2009to
2010
2010to
2011
Median
Revenues decreased
Annual Change to the Total Operating Revenues Between Years
Industry Revenue Growth Roller Coaster
DataanalyzedbytheEnvironmental FinanceCenterattheUniversityofNorthCarolina,ChapelHillandRaftelisFinancialConsultants,Inc.Data
Source:Moody'sWaterandSewerMunicipalFinancialRatioAnalysis.Thecohortof485utilitiesisconsistentacrossallyears.
Annual change in total operating revenues among the same 485 utilities nationwide
Changing Revenues of 2,838 Utilities in 6 States
Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Revenues are: total operating revenues in CA, GA, NC, WI; gross revenues
In OH; revenues that can pay for debt service in TX. The sample of utilities in each state is consistent across all
Years (e.g.: the same 946 utilities in CA are analyzed every year). Data sources: California State Controller’s Office,
Georgia Department of Community Affairs, North Carolina Local Government Commission, Ohio Water
Development Agency, Texas Water Development Board, Wisconsin Public Service Commission.
Audience Poll: How did your total revenues change in the last 10 years?
• Steadily increased
• Increased some years and decreased in • Increased every year but increases slowed others
during recession
• Steadily decreased
• Stayed the same
• Don’t know
• Other
Are revenues keeping pace with O&M expenses?
Are revenues keeping pace with expenses, including depreciation?
Operating ratios for 529 utilities nationwide
Are revenues sufficient to cover O&M expenses?
Expenses exceeded Revenues
Trends in non‐capital operating ratios among a cohort of 1,236 utilities in OH, TX, and WI
Are revenues sufficient to cover expenses including depreciation?
Expenses exceeded Revenues
Trends in operating ratios among a cohort of 1,596 utilities in CA, GA, and NC
Trends in Long‐Term Debt
Long‐term debt for 192 water and combined utilities from 2003‐2012
Audience Poll: Are your revenues generally sufficient to pay for your expenses?
• Revenues not enough to pay for O&M expenses
• Revenues not enough to pay for O&M expenses plus capital costs (debt/cash, or depreciation)
• Revenues exceed O&M and capital costs, but not much left for building up reserves
• We are aggressively building up reserves from excess revenues
Financial Repercussions of Covering Debt
8
DebtServiceCoverageRatio
7
6
5
25thto75th
Percentile
(middleline
ismedian)
4
3
2
10thto90th
Percentile
1
0
Aaa
n=18
Aa1
n=50
Aa2
Aa3
A1
A2
n=191 n=166 n=171 n=44
MostRecentCreditRating
A3
n=19
Baa1
n=14
Dataanalyzed bytheEnvironmentalFinanceCenterattheUniversityofNorthCarolina,ChapelHillandRaftelisFinancialConsultants,Inc. Datasource:Moody's
ratingagency.
Debt service coverage ratio for 673 water and combined utilities by most recent credit rating
Financial Repercussions of Covering Debt
Credit
Principal
Rating
$40,000,000 AA
$40,000,000 BAA
1
Interest
Principal + Interest
Rate
Interest Rate
After 1 year (at
1
1
(2009)
(2013)
2009 rate)
0.049
0.0275
$41,960,000
0.074
0.039
$42,960,000
Cost Savings in 1 year:
$1,000,000
Principal + Interest
After 1 year (at
2013 rate)
$41,100,000
$41,560,000
$460,000
Interest Rates calculated from Figure 3.3
Cost savings from interest rate differences due to credit rating
Trends in Rates
THE MAJOR LEVER: RATES
Trends in Rate Adjustments
Percent of utilities changing rates in five states (n=3,102 utilities)
Changing Rates for 1,961 Utilities in Six States
Cumulative bill increases for 1,961 utilities in six states compared to CPI by region Trends in Rates and Revenues
Biennial rate modifications nationwide, 2000‐2012 (n=329 utilities)
Audience Poll: How often do you usually change rates?
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At least every year
Every couple of years, on average
Every 3‐5 years
We usually maintain rates for more than 5 years
Don’t know
Frequency and Degree of Rate Changes
Average rate adjustment by frequency of raising rates (n=1,966 utilities)
Frequency and Cumulative Degree of Rate Changes
Average 5‐year cumulative rate increase by frequency of rate adjustments (n=1,966 utilities)
Rate Adjustments by Volume
Median monthly water bill by level of consumption (n=58)
Fixed Versus Variable Rates
Base (fixed) charge portion of the residential water bill for 5,000 gallons/month in 2007 and 2012 for 1,260 utilities in Georgia, North Carolina, and Wisconsin
Audience Poll: Did you recently change the ratio of your base charges and volumetric charges?
• We increased the base charge proportion of the average bill
• We increased the volumetric charge proportion of the average bill
• We changed rates, but the proportions stayed the same
• Don’t know/Can’t tell
• We didn’t change rates recently
“In all three states, 61%‐66% of the utilities had lower revenue increases than rate increases (points below the 1:1 line), and almost every utility that raised rates by more than 50% had relatively lower revenue increases. “
Revenue increases
Are revenue increases keeping pace with rate increases?
Rate increases
Graphs show increases in rates and revenues among 566 utilities in three states
DataanalyzedbytheEnvironmentalFinanceCenterattheUniversityofNorthCarolina,
ChapelHillandRaftelis FinancialConsultants,Inc.Lineindicatesthe1‐to‐1ratiobelow
whichrevenueincreaseswererelativelylowerthanrateincreases.
FACTORS INFLUENCING REVENUE RESILIENCY
Factors Influencing Revenue Resiliency
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Service Area Size and Diversity
Water Use and Weather
Economic Conditions
Capacity Utilization
Economic Regulation and Governance
Financial Management Strategies
Credit Rating Agencies
Service Area Size and Diversity
Table 3.1
Utility financial performance in FY2012 among 382 local government utilities in North
Carolina, by utility size
Operating revenues Operating revenues
Number of
Number
Operating
sufficient to cover
insufficient to cover
service
of utilities
revenues
debt service and
operations and
connections
insufficient to
operations and
maintenance
cover operations
maintenance
expenses plus debt
and maintenance
expenses
service
expenses
1-999
162
17%
17%
66%
1,000 – 9,999
172
5%
21%
74%
10,000+
48
0%
8%
92%
Source: Adapted from (Eskaf et al. 2013)
Table 3.2
Median water and wastewater monthly bills in North Carolina in 2013, by utility size
Number of
Number of
Median water
Number of
Median wastewater
accounts
water rate
bill for 5,000
wastewater rate
bill for 5,000
structures
gallons/month
structures
gallons/month
1 – 999
117
$29.35
98
$38.83
1,000 – 2,499
90
$30.48
80
$36.80
2,500 - 4,999
81
$30.29
77
$34.58
5,000 – 9,999
75
$27.05
55
$35.00
10,000 – 24,999
76
$28.60
55
$31.80
25,000+
72
$26.30
57
$34.81
Source: Adapted from (Eskaf et al. 2013)
Water Use is Declining for Many Utilities
MGD sales in 2012 compared to 2006 among 129 utilities nationwide Water Use and Weather:
One Utility’s Experience
0.0
2008 – AB Reductions
2003 – Refinery Reuse
2012 2012 – Refinery Closed
2010
2008
2006
2004
2002
2000
1998
1996
10.0
1992 - EPA Energy Policy
20.0
1994
30.0
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
70.0
1956
1954
1952
1950
…and another’s
Newport News Waterworks’ Drop in Demand
60.0
50.0
29 MGD
40.0
Economic Conditions
Fiscal Year: ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12
California (n=946)
4.5%/year
2.2%/year
Georgia (n=333)
6.2% 0.1%/year 3.9%/year
North Carolina
3.6%/year
5.7%/year
2.8%/year
(n=306)
Ohio (n=400)
1.2%/year
Texas (n=286)
4.7%/year 2.1%/year
Wisconsin (n=567)
2.1%/year
0.8%/year
Average trends in median increases to operating revenues in cohorts of utilities in six states
Economic Conditions
Comparison of the cost of water as a percent of median household income and as percent of poverty threshold
Economic Regulation and Governance
Municipal/County‐owned utilities
Independent authorities and districts
Private investor‐owned companies
Government‐owned utilities regulated by utilities commission
• Other types of economic regulation and oversight
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Credit Rating Agencies
Key credit rating considerations of S&P for 18 drinking water utilities from 2010‐
2012
Credit Rating Agencies
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“Denver Water’s debt guidelines state the organization’s desire to maintain the standalone revenue bond rating at a level of AA or better.” (Denver Water 2012) Objective A: Maintain AAA 7‐year financial goals and meet appropriated designated fund level goals.” (Mesa Water 2011)
Credit rating is one of the performance measures tracked by the Office of the General Manager at the Metropolitan Water District of Southern California. The intent of the measurement is to “enable Metropolitan to access capital markets at the lowest borrowing cost.” The target is set at AA, Aa2 or better. (Metropolitan Water District of Southern California 2010)
“Maintain WaterOne’s current Bond ratings for senior debt of AAA from S&P and Aaa from Moody’s.” (Water District No. 1 of Johnson County 2012)
The [Clayton County Water] Authority’s primary objectives [of its debt policies] are to minimize debt service and issuance costs; maintain access to cost‐effective borrowing; achieve the highest practical credit rating; ensure full and timely repayment of debt; maintain full and complete financial disclosure and reporting; and ensure compliance with applicable state and federal laws.” (Clayton County Water Authority 2011)
Revenue Resiliency: Trends – Factors ‐ Strategies
ASSESSING THE REVENUE RESILIENCE OF THE INDUSTRY’S BUSINESS MODEL
•
•
Trends in Financial Performance
• Operating Revenues
• Operating Expenses
• Debt
Pricing Trends and Financial Resilience
STRATEGIES AND PRACTICES FOR REVENUE RESILIENCY
FACTORS INFLUENCING REVENUE RESILIENCE
•
•
•
•
•
•
•
Service Area Size and Diversity
Water Use and Weather
Economic Conditions
Capacity Utilization
Economic Regulation and Governance
Financial Management Strategies
Credit Rating Agencies
•
•
•
•
•
•
•
Demand Projections
Alternative Rate Designs
Rate Stabilization Reserves
Rethinking Utility Services
Financial Performance
Targets
Customer Affordability/Assistance Programs
Rate Adjustment Approaches
Learn more
• Webinar on Strategies and Practices for Revenue Resiliency
Thursday, February 13th
3pm‐4:30 Eastern
• Environmental Finance Blog
• Tools
– Customer Assistance Program Cost Estimation Tool
– Revenue Risk Assessment Tool
• Report – Defining a Resilient Business Model for Water Utilities ‐ 4366
Questions?
Jeff Hughes
Shadi Eskaf
Director, EFC
Senior Project Director, EFC
[email protected]
[email protected]
919‐843‐4956
919‐962‐2785
Mary Tiger
Chief Operating Officer, EFC
[email protected]
919‐843‐4958
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